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DOJ's Reversal on the Wire Act - What It Means for Internet Gaming

by: J. Daniel WalshGreenberg Traurig, LLP - Washington Office

January 3, 2012

Previously published on December 28, 2011

On Friday, December 23, 2011, the Department of Justice (DOJ) released for the first time a memorandum signed by Virginia A. Seitz, the Assistant Attorney General for the Criminal Division, dated September 20, 2011, responding to two different inquiries — one from two state lotteries and one from two U.S. Senators — about the applicability of the Wire Act (18 U.S.C. § 1084) to intrastate sales of lottery tickets on the Internet. In a 180-degree reversal, the DOJ memo takes the position that the Wire Act does not apply to non-sports betting. This change in position has wideranging implications for the Internet gaming landscape in the U.S. Of particular interest, it means that DOJ will no longer contend that states cannot license intrastate Internet gambling, provide lottery games over the Internet or compact with each other to provide interstate gaming.

Much of the gaming industry had heard rumors that such a memo was in process, and few were surprised that DOJ chose to delay release of the memo until the Friday before Christmas to minimize press coverage.

The Wire Act

The Wire Act was passed in 1961 as part of a Kennedy-era push against organized crime. It reads in relevant part:

“Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both.”

The Justice Department had long maintained that, despite the reference to “sporting event or contest,” the Act effectively prohibits any telecommunicated wager placed or received by a person located in the United States.1 DOJ had also maintained that even Internet wagers placed and accepted within the same state violated the Wire Act, arguing that the publicly-switched telephone network and the Internet are inherently interstate media.

From 1996-2006, Congress tried on several occasions to update and clarify the Wire Act as to what it did and did not prohibit; each of these efforts failed primarily because of internecine fights between different gaming sectors — i.e., commercial vs. tribal, horse vs. dog racing, lotteries vs. convenience stores. In 2006, Congress abandoned efforts to update the Wire Act, and instead passed the Unlawful Internet Gambling Enforcement Act (UIGEA, 31 U.S.C § 5361-67), which prohibited the acceptance or processing of a financial instrument for the purpose of “unlawful Internet gambling” but did not directly define that term, instead relying on other federal and state laws as to what wagers were illegal. UIGEA did include certain exceptions from its enforcement mechanism, including wagers accepted by a state-licensed entity from individuals in the state where it was licensed, but UIGEA made clear that it did not intend to legalize those wagers.2

In 2002, the Fifth Circuit Court of Appeals upheld a lower court ruling in a civil case that found that the words “sporting event or contest” made clear that the Wire Act only applied to sports betting.3 No other Circuit has ruled directly on the point. DOJ nonetheless had made clear that they did not agree with the Fifth Circuit’s findings.

Late in 2010, the District of Columbia enacted a law allowing its lottery to provide both lottery tickets and casino-type games to individuals in D.C., and the D.C. lottery is preparing to launch its Internet products. It was in response to this that Senators Harry Reid (D-NV) and Jon Kyl wrote to Attorney General Holder asking him to clarify DOJ's position as to whether the Wire Act would prohibit this. In addition, two state lotteries had asked DOJ to clarify its position regarding Internet sale of lottery tickets. In the memo released on December 23, DOJ adopted much of the Fifth Circuit's reasoning in stating that, because the Wire Act only prohibits sports betting, there is no federal impediment to states in selling lottery tickets on the Internet.

What does the new DOJ position mean for different sectors:

U.S. Commercial Gaming. It means that states can now pass laws authorizing the licensure of intrastate Internet gambling. Pursuant to Nevada statutes, on December 23, 2011, Nevada's Gaming Commission adopted regulations to license online poker websites for intrastate play, and will be positioned to regulate interstate play should federal law authorize the same. In addition, Internet gaming or poker bills are pending in at least four other states: New Jersey, California, Florida and Iowa. It also may be that states could compact with each other to allow interstate provision of such games based on a revenue-sharing formula, similar to the multi-state lottery offerings like Powerball.

State Lotteries. States can now sell lottery tickets on the Internet, and several states, including New York and Illinois, have laws in place that allow this. While there is little controversy surrounding the sale of time-drawing tickets on the Internet, sales of virtual instant scratch-off tickets are likely to be far more controversial, as such a ticket makes a computer function in a manner identical to a slot machine. The National Association of Convenience Stores and its state chapters are likely to be vehemently opposed to scratch-off tickets on the Internet. Companies that provide services to state lotteries are likely to push states toward expanding their lottery offerings on the Internet. There will likely be state-by-state battles between commercial and lottery gaming interests as to whether states should license commercial operators to go on the Internet, or provide the games themselves through their lotteries — such fights are occurring in Canada and Europe today.

Tribal Gaming. The implications for tribal gaming are less clear. Under the Indian Gaming Regulatory Act (IGRA, 25 U.S.C. § 2701 et seq), if a state provides or licenses gaming, the tribe is supposed to be allowed to provide similar games on its reservation land.4 Tribal governments will likely argue that if a state lottery offers Internet gaming within a state, or if the state licenses commercial operators to accept Internet wagers, then a tribal government located within that state should be able to license its gaming enterprise to accept Internet play from anywhere in that state. However, some states will likely argue that tribes should only be allowed to accept Internet play from the reservation, as wagers from off the reservation are not “Indian gaming” as defined by IGRA.

Offshore Internet gaming operators. Some will hail this as a victory for offshore Internet gaming operators who have accepted non-sports Internet bets from the U.S. To be sure, such operators relied on legal opinions that maintained that the Wire Act only applied to sports betting, and the DOJ action validates those opinions. However, DOJ maintains that nearly all states have laws that prohibit the acceptance of wagers, except when such wagers are accepted pursuant to a state license, and that those prohibitions also apply to individuals outside the state who accept wagers from individuals within the state. The so-called “Black Friday” indictments of April 15, 2011, of individuals associated with the three largest U.S.-facing Internet poker sites did not reference the Wire Act, but instead relied on IGBA.

Federal Legislation. Several bills have been introduced in Congress to license and regulate Internet gaming. In the current Congress, H.R. 1174 (Campbell-Frank) would have the Treasury Department license and regulate all forms of Internet gaming except sports betting. H.R. 2266 (Barton) would have the Commerce Department approve state gaming commissions to issue licenses to accept Internet poker bets, such that any operator licensed by an approved state could take play from any state that hadn’t opted out of the federal system.5 Some (particularly lottery interests) argue that new DOJ position means no federal legislation is needed. Others (mainly Nevada commercial gaming interests) argue that it means federal legislation is needed now more than ever. We believe the new DOJ position will provide impetus for hearings on Capitol Hill, and for a renewed push from Senate Majority Leader Harry Reid of Nevada to pass federal legislation to license and regulate Internet poker on an interstate basis.

1See inter alia Testimony of Kevin V. DiGregory, Deputy Assistant Attorney General, Criminal Division), : Internet Gambling Prohibition Act of 1999: Hearing on H.R. 3125, Before the House Judiciary Committee, Subcommittee on Crime, 106th Cong. (March 9, 2000) (http://judiciary.house.gov/legacy/digr0309.htm). 2See 31 U.S.C. § 5361(b): “No provision of this subchapter shall be construed as altering, limiting or extending any Federal or State law or Tribal-state compact prohibiting, permitting or regulating gambling within the United States.” 3In re Mastercard, 132 F.Supp.2d 468 (E.D. La), aff’d. 313 F.3rd 257 (5th Cir. 2002) 4 This is an oversimplification for the sake of brevity, but describing the full Class III compacting process would take a lot of time and is extraneous to the point of this memo. 5 This too is an oversimplification for the sake of brevity. Greenberg Traurig lawyers and lobbyists have been very involved with all federal efforts involving Internet gaming; anyone requiring a more thorough discussion of such bills should contact J. Daniel Walsh in the Washington office.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.